Lifetime ISA to help young – but with sting in tail

The proposed lifetime Isa will prove attractive to younger savers despite a sting in the tail that could cause controversy in years to come.

The announcement of the new Isa was the closest thing in the 2016 Budget to the proverbial rabbit from the hat, catching the savings and pensions industry unawares.

The scheme, to be launched in 2017, will allow people aged between 18 and 40 to save up to £4,000 a year into the account and receive a bonus of 25% on the amount set aside before their 50th birthday.

The proceeds can be used towards retirement or for a deposit on a first home worth up to £450,000. Savers will be able to transfer from their existing Help to Buy ISA to the new Lifetime ISA or continue to save into both.

However it will form part of the ordinary Isa allowance – rising from £15,240 to £20,000 in 2017 – and will not be in addition.

If the account is used for retirement the saver will be allowed to take the money tax-free after their 60th birthday. But withdrawals before that date will attract a 5% charge and will be paid without the government bonus (and interest or growth on it).

That charge will prove distinctly unpopular, particularly when compared with exit fees on other pension products that are now, on the whole, far lower.

The reaction from the pensions and savings industry was mixed. The lifetime Isa is a “gimmick” that will only appeal to younger savers looking for help getting on the housing ladder, claimed Adrian Walker, retirement planning expert at Old Mutual Wealth.

“The £1 bonus for every £4 is parity with the basic rate relief you currently receive on a pension, but crucially without employer contributions. Younger savers will also have to place faith in future governments not to renege on the promise of a bonus at age 60.”

There are concerns too that the lifetime Isa could undermine automatic enrolment, which began in 2012 and has already resulted in a marked increase in the number of people paying into workplace pensions.

Steve Webb, former pensions minister and now director of policy at Royal London, said: “Young workers have had some of the lowest opt-out rates when they have been enrolled into workplace pensions, yet the Chancellor’s desire for a shiny new initiative could undermine the huge progress which has just been made in ensuring young workers have savings for retirement.”

But firms insist that pensions will continue to offer value for young savers. Richard Parkin Head of Pensions at Fidelity International, said: “We welcome any changes that encourages and incentives saving for the longer term – particularly those in the younger age group who are facing real struggles between saving for a pension and saving to get on the property ladder.”

The beneficiaries will include the growing army of self-employed workers, who are excluded from automatic enrolment, noted Scottish Widows.

Other pensions measures include new restrictions on salary sacrifice, where employees can give up part of their salary in exchange for other benefits, such as extra employer pension contributions. These arrangements will remain available, contrary to expectations, but only for certain benefits, including pension contributions, childcare and health-related benefits such as the Cycle to Work scheme.

The government also revealed in the Budget documents that it will consult the introduction of a ‘pensions advice allowance’ to allow people to withdraw savings to pay for regulated advice. The proposal, set out in the Financial Advice Market Review on Monday, will allow savers aged below 55 to withdraw up to £500 tax free from defined contribution pensions to redeem against the cost of financial advice.